I’ve noticed that a lot of GonzoBankers have a high tolerance for pain.
I’m not talking about physical pain, rather, the mental anguish that comes from listening to countless fintech vendors’ bogus claims about their technologies’ returns on investment (ROI).
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My latest experience with this form of agony came from a vendor that was briefing me on its big data analytics platform (the ROI on a meaningless buzzword—double the pain). At one point, the vendor put up a slide that said its platform delivers an ROI of 650%. Here’s a snippet of the ensuing conversation:
Me: How was that ROI calculated?
Vendor: It’s based on the revenue that was generated from the marketing campaign that was executed using our platform. The analytics work we did identified consumers who were the most likely to accept an offer for the product in question. Offers were sent out, and we calculated an ROI based on the response rates.
Me: (Somewhat perplexed, but sensing an opportunity to shred the logic to pieces) OK, I might have a few questions here. For starters, wasn’t it really the development of the propensity model that should get the credit for the ROI on that campaign?
Vendor: Absolutely. But it was our analysts who developed the model.
Me: But your analysts could have used any BI platform to create the model. OK, forget that. Why didn’t you factor in the costs of providing the service or product sold into the equation?
Vendor: We didn’t have access to that information.
Me: (Stunned, but pushing ahead nonetheless) Ooooookaaaaay, but why would you base the whole ROI estimate on a single project? What makes you think other firms would achieve the same results?
Vendor: The ROI we’re showing here is for illustrative purposes.
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It’s painful just recalling that encounter, but these claims run rampant in the industry. The real question that needs to be addressed is: Why do fintech vendors feel compelled to make bogus claims about their technologies’ ROI?
The answer: Because IT buyers want those ROI estimates to justify IT investments.
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IT project sponsors know that, in order to get funding for an IT investment, the executive team is going to ask, “What’s the ROI?” So project sponsors either rely on vendors’ estimates (incredulously), or make some assumptions about how that will play out in their own organizations.
I don’t really need to tell you that, even if the vendors’ ROI claims were accurate, one firm’s returns are no indication of, or representative of, the ROI that other firms will generate. Different markets, different capabilities, different execution tactics, etc., all combine to make one firm’s ROI completely irrelevant.
But how accurate could the internally-generated estimates really be? Will the firm really be willing to let people go in order to achieve cost savings? Will deployment , integration and execution costs for the new technology really be in line with the vendor’s estimates? How realistic are assumptions regarding 
conversion rates on marketing offers, or adoption rates on new technologies?
Asking “what’s the ROI?” of a technology investment before the actual deployment begins—that is, before all the hard work about what needs to be done, what’s going to get done, and when it’s going to get done given all the other things going on—is no more of a rational question than stopping Dan Rather in the street and asking, “What’s the frequency, Kenneth?”
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This begs another question: Why do executives ask project sponsors for the ROI of the project? Anyone who thinks it’s because the ROI is needed to justify any IT investment is wrong. Dead wrong.
At a meeting of chief risk and credit officers from 15 of the 50 largest card issuers in the United States, someone asked the group “How many of you have ‘360-degree-view-of-the-customer’ projects currently under way?”
Every one of the execs raised their hands.
I quickly jumped in with this question: “How many of you did ROI projections on those projects?”
Not one person raised a hand. Not a single bank represented in that room felt compelled to estimate what the actual financial benefit—in terms of reduced costs or increased revenue—of spending millions of dollars to integrate customer data files would be.
They made the investments because they believed it was the right thing to do.
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So, let’s ask again: Why do execs ask IT project sponsors for ROI projections? The answer might be a tough pill to swallow, but “what’s the ROI?” is code for:
- I don’t want to make the investment in the technology, and/or
- I don’t understand what the technology can or will do.
Asking project sponsors for ROI projections is a way for execs to say no. “Sorry Jim, but we have other projects with more lucrative ROI projections than yours that we’re going to fund.
Asking project sponsor for ROI projections is a way for execs to say—without having to actually say it—”maybe if you give me ROI projections on this social media monitoring technology it will help me understand what exactly it’s supposed to do, and how it will benefit us.
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If ROI projections done during the justification phase belong in the fantasy or science fiction—and not the non-fiction—sections of the library, does this mean banks shouldn’t forecast the ROI of IT projects?
No. It simply means that ROI projections shouldn’t be used as justification for a project moving forward from the concept phase. Business strategy, competitive analysis, and lots of other qualitative reasons should drive that determination.
ROI projections—done at the start of a funded project—should be used to gauge a project’s success and to provide management with goals and targets to determine if a project is on track, or if a completed project met it targets. ROI forecasts done at the justification phase are just not reliable enough to be the guide for tracking or performance analysis.
If done at the start of a funded project, however, project sponsors might just be able to reliably answer the question, “What’s the ROI, Kenneth?”
Personal note: I’m excited to be joining Cornerstone Advisors as Director of Research and contributing to the GonzoBanker site. Cornerstone Advisors Senior Director Sam Kilmer and I will be at the 2015 Financial Brand Forum [3] in Las Vegas April 29 to May 1. We’d love to connect with fellow GonzoBankers there. The first five GonzoBankers to find me at the conference and give me a business card (and tell me how much you loved this post) will get a signed copy of my book Smarter Bank.
One point of clarification: You can’t just give me anybody’s business card–it has to be YOUR business card. And you have to work for a bank, credit union, or fintech vendor.